The federal government is planning to increase the petroleum levy on motor gasoline and diesel from Rs60 to Rs80 per litre to combat Pakistan’s rising circular debt, which has reached Rs2.9 trillion in the gas sector. In addition to this levy hike, officials are considering new levies on petroleum products and increasing gas tariffs beyond the current requirements. This would generate extra revenue to help reduce the debt.
What is Circular Debt of Pakistan?
Circular debt is a complex financial problem that occurs when one entity in a supply chain cannot pay its debts to suppliers, who in turn can’t pay their creditors, creating a chain reaction of unpaid bills. This often starts with the government not fully compensating power producers and gas suppliers for subsidies or price controls in Pakistan’s energy sector. This debt then trickles down through the energy supply chain, affecting gas companies, and power plants, and eventually impacting the entire economy by creating inefficiencies and financial instability.
To tackle this, the government is looking into using the Gas Infrastructure Development Cess (GIDC) funds, currently held by the Finance Division. They are also exploring ways to offload inter-corporate debt, partly in cash and partly through accounting adjustments. This method previously used by former finance minister Ishaq Dar in 2013 to clear power sector debts.
Implementing these measures would require new legislation. Specifically, a new act would need to passed by the National Assembly to create a special levy for retiring the gas sector’s circular debt. Additionally, amendments to the GIDC Act would allow the government to use the Rs350 billion collected from various companies for debt repayment. A further Rs400 billion in GIDC payments remains outstanding from the fertilizer and CNG sectors.
The Finance Ministry, following IMF guidelines, has decided not to allocate budgetary subsidies to cover the Rs260 billion loss from the non-recovery of RLNG diversions to domestic consumers. The Petroleum Division tasked with finding practical solutions to this issue. Experts suggest that raising gas tariffs beyond what needed by gas companies could generate surpluses to help reduce the debt, but this would require strong political commitment. The government is also considering maintaining current natural gas prices from July 2024, instead of implementing the recommended 10% reduction, to address a projected Rs1.5 trillion shortfall.
